I recently had some time to myself (a rarity nowadays!) as I was doing a few transcon flights, so I picked up the new book on Theranos (Bad Blood: Secrets and Lies in a Silicon Valley Startup). I just finished the book – it’s a great read with a lot of interesting, painful lessons.

Silicon Valley’s VC “Cult of Personality” venerates the unstoppable, delusional young founder that builds the next Facebook when all the data shows us that – generally speaking – entrepreneurial success comes from knowledge, skills, and experience. Repeated studies¹/data² show that the average age of a successful startup founder is closer to 40³ than 20.

I mean, sure, you can bang your head against the wall and build a web app in your dorm room and be the next Facebook. And yes, there are classes of problems that are fundamentally doable and if you want it done faster/cheaper, hiring a 20-something founder to work on it 250 hours a week will get you there. But Medical/health/devices are not that class of problem. I’m as startuppy as they come, but we’re talking about folks’ health and lives here. Moving fast and breaking people is a bad idea.

Wisdom is what separates someone with an idea and someone who will actually be successful. Theranos was the equivalent of “I have a dream of perpetual motion” and then investors going “wow that dream is great and you’re so passionate about it here’s $1B!” Theranos played to the worst of VC “we invest in people not ideas” trope, exploiting all the cognitive biases we see in investment disasters: FOMO, authority bias, similarity bias, ineffective oversight, and ignoring dysfunctional leadership/founders.

Fear of Missing Out

Walgreens got burnt to the tune of $140m after it turned out Theranos’ tests didn’t actually work. Walgreens is quoted in the book:

“We can’t not pursue this,” he said. “We can’t risk a scenario where CVS has a deal with them in six months and it ends up being real.”

Successful entrepreneurs use FOMO strategically to drive up value – either in a fundraising round or in selling the company. By leveraging loss aversion, Theranos was able to get Walgreens and Safeway to sink vast sums of time and money in partnerships that failed.

Ineffective Oversight

Who thought it was a good idea for a 19 year old to control a billion dollar company? Someone who was living with/in a relationship with the company president? ⁵ Where was the board? How did they get played so bad as to give Elizabeth complete control of the company? Why did the investors let her pack the board with irrelevant but influential people? ⁷

Did it have something to do with Tim Draper being a neighbor of Holmes?⁸

Terrible, Dysfunctional Leadership

By all accounts, Holmes and Balwani were terrible managers and ineffective leaders. Theranos hired amazing, smart people, and then fired them when they dared to claim the emperor had no clothes.

The biggest problem of all was the dysfunctional corporate culture in which it was being developed. Holmes and Balwani regarded anyone who raised a concern or an objection as a cynic and a nay-sayer. Employees who persisted in doing so were usually marginalized or fired, while sycophants were promoted.

and

they summoned the staff for an all-hands meeting in the cafeteria. Copies of The Alchemist, Paulo Coelho’s famous novel about an Andalusian shepherd boy who finds his destiny by going on a journey to Egypt, had been placed on every chair. Still visibly angry, Holmes told the gathered employees that she was building a religion. If there were any among them who didn’t believe, they should leave. Balwani put it more bluntly: Anyone not prepared to show complete devotion and unmitigated loyalty to the company should “get the fuck out.” ⁶

Requiem for a Dream

It doesn’t appear Theranos is going to exist much longer⁹. Holmes and Balwani may still face criminal charges; in the least, I sincerely hope they never raise any money, nor hold a position of power in any company ever again.

I hope that this event will cause investors to sit back and consider why they got played, but I doubt they will. There’s so much money sloshing around in Silicon Valley⁴ that it’s better to lose $100m shooting for $100b than it is to not play at all.

Footnotes